You’ve identified a “search, develop and commercialize” trend for pharmaceutical and biotech companies. Can you explain this trend?

“The industry was founded around innovative drug discovery and development. The reality now is that most of the major companies sell about 50 percent of products discovered elsewhere. And the existing business model of large pharmaceutical companies is such that they are almost forced to go outside and look at in-licensing and acquisition to bolster their development and commercial pipelines.

Some of the large companies have little in their pipelines for the next five years so they really do not have any choice but to go out and acquire new drugs and compounds. Companies have now become so good at commercialization that some are prepared to take commercial risk, but don’t want to take any scientific risk. This has led to a shift in companies’ business models.

What role does the lack of blockbuster drugs in the current pipeline play in this industry trend?

A product pipeline is a 10-year reality because that’s how long it takes to get a product from discovery through FDA approval. When you look at the current drugs in the pipeline, about 75 percent of the drugs are specialty medications. You can still generate significant revenue from a specialty product, but the challenge becomes how you manage a portfolio of smaller products when the existing business model is geared toward selling large, primary-care drugs.

Currently, if a product does not generate $500 million in sales, it is almost impossible for a large pharmaceutical company to break even with the existing promotional processes. This requires a change to all the fundamentals of their business model. You can’t change the product pipeline because it takes too long. You need to find a different way of commercializing.

Are you seeing more alliances between pharmaceutical and biotech companies?

Yes, there are a lot of areas where the two industries are converging. Major biotech companies are making bets on small-molecule compounds, typically the realm of the pharmaceutical industry and all major pharmaceutical companies are making bets in biotechnology. Pharma companies are looking to biotech and specialty products out of necessity. In the past, they may have passed in order to wait on the next big thing.

Most of these companies don’t have the skill-sets to do both product development and commercialization. This is an important point for the future and the growing necessity for alliances between pharmaceutical and biotech companies.

What are examples of the differences in skillsets between biotech and pharmaceutical companies?

The big pharmaceutical companies are sophisticated at tackling large, primary-care markets, but they don’t necessarily have all the expertise on small, niche-disease states. Biotech companies mainly market to those smaller niche groups. Biotechs now need to get into more large-scale, primary-case commercialization. Biotechs need a different infrastructure and skill-set. One group has what the other needs.

Is it strictly strategic alliances or are you seeing Mergers and Acquisitions as well?

It’s both. However, the industry can only consolidate so far because you will start to have SEC , antitrust and competition issues if companies start to have too much crossover in too many therapy areas.

However, we are seeing a significant increase in the early-stage strategic alliance partnerships with payments for milestones around proof-of-concept and clinical development endpoints. These alliances are not necessarily acquisitions, but a dating game that may or may not lead to an acquisition.

What are the main reasons for the mergers and acquisitions and how is the regulatory environment affecting the activity?

Access to a broader pool of new chemical entities, new compounds and new biologics is the main reason. New regulations have required that every transaction be consolidated into a Profit and Loss statement. This has changed the dynamic regarding the decision to form an alliance or acquire.

What makes Deloitte an attractive partner for companies in the biotech and pharmaceutical industries?

Deloitte’s ability in tax, financial advisory services, as well as our experience in auditing the industry makes us an ideal partner. The biggest challenge today are not the acquisition of intellectual property or a compound, but the integration of these businesses into the acquiring company. A company wants to acquire more than just a molecule or compound. There may be intellectual property or scientific know-how of some of the research scientists. Deloitte focuses on executable strategy, and our ability to implement, integrate and bring synergy out of relationships makes Deloitte attractive to companies in the biotech and pharmaceutical industries.

You’re also involved with the Center for Health Solutions’ upcoming paper on personalized medicine and targeted therapies. Can you give your perspective on the challenges in the industry regarding targeted therapies?

The challenge in the healthcare system today is looking long-term. Typically, a patient stays with an insurance company for an average of 18 to 24 months. Payors look at costs in silos. They look at pharmaceutical benefit, they look at an in-patient hospital benefit, an outpatient benefit etc. They don’t look long-term.

Implementing a therapy that is preventive in nature and potentially highly expensive, payors don’t always do the analysis necessary to look at what targeted therapies and personalized medicine will do to avert health-care costs in the future.

I believe targeted therapy and personalized medicine will make a positive contribution toward health care saving. But if you look at it strictly as a silo within pharmaceutical benefits, yes, these ideas look expensive, but we don’t have a full understanding of their full clinical impact yet.